Don’t Confuse a Relocation Reimbursement and a Relocation Bonus
Employers often offer relocation reimbursement expenses and bonuses as part of job relocation packages. While both are welcome benefits, it is important to understand the difference between relocation reimbursement and bonuses.
What is a Relocation Reimbursement?
A relocation reimbursement is issued in order to repay the employee for the cost of relocation. These terms are negotiated and presented in the employee’s relocation package.
Bonuses and employer paid moving expenses, such as house hunting relocation reimbursements, qualify as additions to employees’ taxable income and require employers to pay standard payroll taxes such as Federal, State, and FICA.
What Is a Relocation Bonus?
In lump-sum programs, employees are responsible for relocation lump sum tax. With a lump sum bonus, a fixed amount of money provided to the employer that is to account for relocation expenses that is treated as taxable income.
If employers choose not to provide tax assistance (gross-up), a percentage of the employee’s total bonus will be taken out to cover the relocation bonus tax owed to the IRS.
For example, if an employee receives a $3,000 relocation bonus and the IRS collective tax rate (Federal, State, and FICA) is 30%, $900 will be taken out of the bonus to cover the tax and the employee will only receive $2,100.
What’s the Difference Between Relocation Reimbursement & Bonuses?
Employee bonuses are typically paid for one or both of the following reasons:
- The employer decides to offer a bonus as an incentive for the employee to agree to relocate.
- The employer recognizes that the cost of living is higher in the new location versus the employee’s current location.
Bonuses as incentives or payments to defray increased cost of living must not be confused with employer paid moving expenses.
Bonuses of this kind are treated as additional taxable income.
Salary increases are usually easier to understand as taxable income, but employees may find it more difficult to accept an additional tax burden resulting from a moving bonus.
Because of this, many employers choose to provide tax assistance (tax gross-up) to further incentivize relocation. However, this can add 45 to 70% to the total spent by the company.
Relocation Reimbursement vs Relocation Bonus: Key Takeaways
Balancing relocation costs and employee satisfaction requires careful consideration.
Employers should adopt relocation reimbursement policies that take advantage of available tax benefits, while offering reasonable, equitable, and fair relocation programs for their valued employees.
When it comes to your relocation program, make sure you have the expert guidance you need. Learn more about our global mobility expertise and how we can support your organization in its growth.
IRS Publication 521: https://www.irs.gov/pub/irs-pdf/p521.pdf
IRS Publication 15: https://www.irs.gov/pub/irs-pdf/p15.pdf
IRS Publication 15-B: https://www.irs.gov/pub/irs-pdf/p15b.pdf